Can Whole Foods Ever Be Cheap?

Whole Foods Market, historically, has not competed on price. That's been a successful strategy, because its educated, affluent shoppers assume that quality must just come at a premium. They're willing to shell out significantly more for pesticide-free pears and artisanal cheese than they might at the Kroger or Safeway down the road.

The price isn't simply a function of the cost of goods, though. Whole Foods' profit margins have been significantly fatter than the supermarket industry's notoriously slim one for years now, at some 3.8 percent to the average of 0.7 percent, to investors' delight: The stock trades at about twice the price of its rivals. Some of that comes from a product mix that skews more toward prepared foods, which command higher prices, but it also benefits from a squishy perception cushion that prevents customers from comparison shopping quite as ruthlessly.

"I think that the conditioning, right or wrong, may be that organic product costs more than genetically modified product," says Joe Feldman, a grocery analyst at Telsey Advisory Group. "So, buying the natural oat-bran cereals, people may just assume this is a natural organic product, and I'll pay a little more for that."

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